You can structure a private lending deal in numerous ways, so rather than explain each one in theory, I want to introduce you to some other real-life investors who actually use private lending every day to run their real estate business. In this section, you’ll meet four BiggerPockets members who have agreed to share how they’ve structured their private money relationships, so you can gain some insight into how you might structure yours.

However, before I get to their stories, let me make a quick disclaimer: You can structure a lending arrangement in many different ways, but legalities can differ by state and even by county. These four investors are all highly professional real estate investors, and all have sought legal counsel before devising their current system for raising money. It’s vitally important for you to do the same—to sit down with an attorney to discuss your plans before you have an official meeting with your potential lender. Consider these interviews descriptive, not prescriptive.

1. Will Barnard—Barnard Enterprises, Inc.

Will Barnard is a full-time, professional real estate investor and developer in Southern California. He currently specializes in flipping luxury homes with values above $1 million. Will has experience in almost every aspect of real estate investing, including spec building, rehabbing, wholesaling, landlording, short sales, land development, and notes. He conducts millions of dollars in real estate transactions each year, primarily using money raised from private lenders.

How do you use private money?

“Typically, I will locate a great potential real estate opportunity and present it to my private lenders, explaining the deal in detail. I don’t utilize a ‘fund,’ but instead treat each deal separately and utilize certain lenders for each specific deal, sometimes using multiple lenders on one property by ‘fractionalizing’ the note, which basically means the note is split between different lenders based on their contributions.”

What kind of security do you offer your lenders?

“Each property we purchase is secured by a note and deed of trust, which gives the lenders the right to foreclose if I don’t fulfill my end of the relationship. Typically, I never borrow more than 70% of the total after-repair value, which gives the lenders a significant cushion against default. They are secured both by the deal and through the proper legal channels.”

“Additionally, I always list each of my lenders on the property insurance as ‘additionally insured,’ so if something were to happen to the home and the insurance money was to cover the loss, I couldn’t simply run off with the insurance settlement check.”

What kind of legal entity do you use?

“My business is a legal corporation (Barnard Enterprises, Inc.), so the private lenders actually make the loan to my corporation.”

“Once I have a deal under contract or am close to it, I send an email out to my private investor list, giving them the entire rundown of the deal, including the ARV, comps, repair list, repair costs, and the purchase price. I also provide the math for the LTV and how much of my cash will go into the deal.”

“I will also, on occasion, post a thread in the BiggerPockets Real Estate Marketplace as well. Most of my private investors started out as family, friends, and people I had a relationship with. My web presence on BiggerPockets.com, my website, etc. also provided the opportunity to build new private investors.”

“My goal when raising money is to attract repeat lenders. I want my lenders to be happy with every part of the deal so they’ll come back to me time and time again.”

What kind of terms and rates do you offer?

“Typically, the terms are 6–12 months and 10%–12% annual interest, with interest and principal due in one balloon installment on maturity date.”

What kind of problems have you run into, and how have you overcome them?

“I have done a few loans over the past year that had interest-only payments rather than balloon payments. Due to longer holding times and holding costs, this has created cash flow and operating capital depletion at times.”

“I have had to borrow more money to complete rehabs to resolve this issue and, in the future, will likely not do any loans with payments. Other than that, I have had little to no problems, and all investors have been paid back both principal and interest every time.”

2. Brian Burke—Praxis Capital, LLC

Brian Burke is co-founder and managing director of Praxis Capital, LLC, a real estate private equity investment firm created to provide high rates of return to his investors while tactically managing risk. He has been a real estate entrepreneur since 1989, purchasing more than 500 properties valued at over $150 million, primarily from foreclosures.

How do you use private money?

“I use private money in three different ways: I borrow it in the form of a private money loan (Loan); Blind Pool Funds (Blind Pool); and in identified asset funds (One Off). Both Blind Pools and One Off deals are considered a ‘fund,’ but in the case of a Blind Pool, the money goes into a pot, and I buy whatever I want with it, so long as the parameters of the deal match the
fund objective. In the case of a One Off, the asset is identified ahead of time, and the fund is assembled for the sole purpose of acquiring that asset and executing the predefined strategy.”

“On a Loan, we use one investor per loan per property. In the case of a fund, it could be funded by one person, but more often than not, it is funded by multiple investors into a pool.”

What kind of security do you offer your lenders?

“In the case of Loans, the source of funds is truly a lender, and the security they receive is a first deed of trust on a single property. I use this strategy to leverage the equity in my Blind Pool funds with debt. In this case, the fund buys a property for cash, then borrows money from a private lender who gets a first deed of trust, and the cash goes back to the pool to purchase more assets. In the case of the Blind Pool and One Off, those investors are not lenders, they are limited partners, and they receive no security other than an ownership interest in the entity.”

“The entity will own all of the acquired assets, so there is real estate behind their investment, but no direct security, as there is in the case of a Loan. Hence, the Loans are not securities, and the investments into the funds are.”

What kind of legal entity do you use?

“For a Loan, my ownership entity, either a Limited Partnership (LP) or Limited Liability Company (LLC), is the borrower, but no entity is formed for the purpose of the loan. The lender is either an individual, trust, LLC, corp, or whatever the lender uses (that’s up to them, and it doesn’t matter to me).”

“In the case of the Blind Pool, I typically use an LP, but that is only because I’m in California, and the LLC fees are high for entities that make a lot of income. Outside of California, I use an LLC. My management entity is the general partner of the LP (or managing member, in the case of LLC), and the investors are limited partners or LLC members.”

Can you describe your money-raising process?

“In the case of a Loan, they write a check or wire money to the title company, and when escrow closes, we receive the funds. In the case of a Blind Pool or One Off, the investor writes the check or wires the money to the LP or LLC, and the money goes in the account.”Related:4 Risks and Drawbacks to Using Private Money

“We have control of the funds and use it to make purchases (Blind Pool) or close on the transaction (One Off).”

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